This Magic Number Can Make or Break You in China’s Stock Market

The number is 23 -- and it’s one of the most powerful forces in China’s $6.4 trillion equity market today.

As the Shanghai benchmark index posts the world’s biggest rally, 23 has become a ceiling for firms trying to tap into it. Even though market valuations have climbed, virtually no companies have gone public at prices of more than 23 times their earnings per share.

That’s no coincidence, bankers say. Chinese authorities have quietly quashed attempts to take businesses public at richer prices. By hewing to the multiple 23, regulators are handing investors an almost guaranteed profit when new shares start trading. Companies, on the other hand, get shortchanged with smaller cash infusions than investors are ready to commit.

What’s so special about 23? The number itself is less important than what it says about the Chinese government and its hold on the nation’s financial markets.

Though regulators have made no official announcement about the ceiling, it first emerged after they tightened oversight of the IPO process in January 2014 to prevent companies and certain investors from colluding to drive up prices -- a practice that had saddled individual investors with losses. The China Securities Regulatory Commission didn’t respond to requests for comment on IPO valuations.

Granted, companies everywhere leave money on the table in IPOs. Bankers often underprice offerings to ensure stocks rise from day one. The strategy can hand a favored few instant profits and generate buzz around the shares.

But in China, the power of 23 is uncanny. Only two of the 147 companies that went public during the past 12 months sold shares above that valuation.

The two that broke through didn’t get far: circuit-board maker Guangdong Ellington Electronics Technology Co. fetched 23.2 times profit in its June offering, while fertilizer producer Hubei Forbon Technology Co. priced at 23.01 times later that month. In all, more than half of the 147 IPOs were valued at levels between 22 and 23 times reported earnings.

To contact Bloomberg News staff for this story: Fox Hu in Hong Kong atfhu7@bloomberg.net; Zhang Shidong in Shanghai at szhang5@bloomberg.net; Aipeng Soo in Beijing at asoo4@bloomberg.net